DECEMBER 11, 2020

By K Srinivasan (IRS)

Since nobody can ever know enough, all advice is prejudice - Danie Abse

THE classical misnomer

There is generally a misnomer that IGST on imports is a tax on supply and therefore the revenue collected from IGST on Imports goes to the IGST pool and subject to apportionment as per the provisions of Sec 17 of the IGST Act, which as per the Author is perhaps not quite right.

IGST on imports is an import duty or a supply tax?

Article 269-A of the Constitution deems import of goods into the territory of India to be a supply of goods in the course of interstate trade or commerce.

Does it automatically imply from the above that IGST on Imports is a supply tax? Perhaps not, is the answer again.

The reason for this can be clearly inferred from Sec 7(2) of the IGST Act that treats goods imported into India as a supply, only until it crosses the customs frontiers of India.

Once the goods imported enter the customs hold, as per Proviso to Sec 5(1) of the IGST Act, levy of IGST as a part of BCD comes into being which is similar to CVD of the erstwhile regime. Only the actual levy of the same is postponed to a point when duties of customs are due to be levied and collected on the said goods under Sec 12 of the Customs Act, 1962 (52 of 1962) in accordance with the provisions of Sec 3 of the Customs Tariff Act, 1975 (51 of 1975) on the value as determined under the said Act.

It thus follows clearly from the above beyond a scintilla of doubt that the IGST is levied and collected on goods imported into India coterminous with the levy and collection of BCD as part of BCD, also under the said self-same CTA read with CA.

Proviso Sec 5(1) distinguished from plain Sec (5) of the IGST Act

In view of the above nature of IGST, being part of BCD collected under the machinery provisions of valuation and levy of customs Act, it is most fittingly covered under the ambit of Proviso to Sec 5(1) of the IGST Act.

However, IGST on Imports by virtue of the Explanation to Article 269-A apparently stand equated to a tax on par with supply of goods or of services or both in the course of inter-state trade or commerce.

Also Article 270 and 279-A distinguished

But on that score it must not be confused with the actual levy of IGST on goods or of services or both, on domestic cross-border/ inter-state transactions, whose levy and collection are governed by Sec 5(1) of the IGST Act without attracting the Proviso under it and subject to apportionment between the Center and the States to be modeled in accordance with the mandate of Article 279-A (4)(c) of the Constitution.

Therefore, the collections from the levy of IGST on Imports are aptly covered under Article 270(1) as duties referred to in the Union List and therefore to be distributed between the center and the states in accordance with the provisions Article 270(2) & (3) ibid. in sharp contrast to the IGST levied and collected from the domestic inter-state supply of goods or of services or both.

Accordingly, by an Act of Parliament IGST Act has been enacted and the apportionment of revenue schemed or modeled on the recommendations of the GST Council, the Supreme constitutional body of GST as envisioned by the Constitution makers under Article 279-A.

Valuation of Composite supply of Imports under the Customs Act, explained

Having said that, all Imports of goods with the addition of Services are strictly a composite supply whose valuation is perfectly taken care by the Customs Valuation machinery under Sec 3 of the CTA and the point of taxation of BCD and countervailing Tax now called IGST under Sec 12 of the CA, to coincide with the actual clearance of goods imported when taken out of customs bond by filing an EX-bond Bill of Entry.

But, there are certain peculiar Imports made pursuant to a Pure Service Transaction, for example leasing of machinery, wet lease of aircrafts and sea crafts and so on, involving transfer of right to use those goods covered under Para 5(e) of Schedule II to the GST Act.

In the above import transaction regardless of it being a pure service transaction, the physical import of those goods into the territory of India, entails BCD based on the intrinsic customs valuation Provisions of the Import transaction on INCO terms as per international trade practice and WTO norms.

The paradox double taxation of goods imported actually in the form of service enfolded into it under GST

It strangely also attracts in addition to BCD on the actual value of transaction, IGST on the annual lease charges paid as consideration towards a distinct taxable supply by virtue of the operation of the mischief of Sec 7(4) of the IGST Act leviable to IGST under Sec 5(1) ibid. without bringing into operation of the Proviso under it.

It is possible for the said service transaction of lease to be clearly identified as a distinct supply of service imported into the territory of India to be deemed as a supply in the course of inter-state trade commerce, liable to IGST a second time, resulting in double taxation though.

But this is an occurrence of exceptional nature where a pure service is enfolded into the Import of goods on lease resulting in a double taxation of IGST calling for neutralization of the IGST to a one-time levy.

The mechanism to mitigate the above double taxation explained

This is sought to be achieved by issuing an exemption notification under Sec 25 of the CA, so as to let it pass off like a stand-alone service import covered as a one-time supply coming under the purview of Sec 7(4) instead of under Sec 3 of the CTA read with Sec 12 of the CA as well.

Customs Exemption Notification is extracted below to illustrate a few cases like the above where the double taxation effect is sought to be neutralized:

Notification No. 50/2017-

1. Entry 547 A- Aircrafts, Aircraft engines and other aircraft parts imported into India under a transaction covered by item 1(b) or 5(f) of Schedule II of the Central Goods and Services Tax Act 2017 - effective from 08.07.2017.

2. Entry 557 A - Rigs and ancillary items imported for and or gas exploration and production imported under a transaction covered by item 1(b) or 5(f) of Schedule II of the Central Goods and Services Tax Act 2017 - effective from 13.10.2017.

3. Entry 557 B - all goods, vessels, ships [other than motor vehicles ] imported under a transaction covered by item 1(b) or 5(f) of schedule II of the Central Goods and Services Tax Act 2017 - effective from 14.11.2017.

The Ocean freight Episode of double taxation explained

But, as far certain other services like Import Ocean freight is concerned the Government had badly failed to mitigate such double taxation both under the Service Tax and the GST regime and issues of Ocean freight is being litigated before the Gujarat HC and in appeal before the SC for the past decade or so.

The Imported goods have such an integral tax liability on the freight and insurance elements sticking to it that the mechanism under the Customs valuation as applicable to Imported goods, until the imported cargo is discharged either on FOB/CIF basis, as the case may be, amply factors in the same in the levy and measure of customs and countervailing duties.

Then where is the question of designating the Importer on RCM basis to pay tax a second time on Ocean Freight which stands already subsumed in the Imports- not to speak of ITC facility being available on the IGST paid a second time.

Articles 246, 246-A, 286 explained and the aspect theory ruled out

Also 'aspect theory' has no application as far as the GST law enacted under Article 246A vis-Ã -vis Customs laws are concerned.

Article 246A can't override the classification under List 1 of Seventh Schedule to the Constitution and the aspect of 'supply' fails to covers under its ambit both 'import of goods' and 'provision of services as a part of import of goods'.

The reason why the above observation would appear to lack the constitutional support is the New Article 246A (2), reserving the powers for the Parliament alone to impose a tax in the matters of interstate-trade and commerce, whose limb is imports, tied with sinews and nerves lent by Article 286.

It has not changed a wee bit since then from the position w.r.t Article 246 and List I of Seventh Schedule, Residuary Entry 97, read with Article 286 i.e. from the old taxation pattern of Customs with countervailing measures as part of Composite supply of goods imported into India.

To claim birth of a new aspect of double taxation in the form of Service Tax/IGST distinct from the subject matter of Imports, would be misleading one to imagine of an overriding effect of Article 246/246A(2)over Article 286 to give way for an additional aspect of levy of a Composite transaction of Import of goods. (Section 2(30) of the CGST Act, 2017, defining a Composite Supply' refers).

The High sea sales episode of double taxation explained and the extra territorial jurisdiction of levy on the basis of territorial nexus principle under Article 245(1) & (2) ruled out.

One is often times peeved by the faux pas committed by the Government in a similar context, in the case of high seas sales, until after repeated Notifications and Circulars that it realized its folly of double taxation and the misplaced understanding it held of revenue neutrality in the form of ITC facility being available for each such double payments.

It originally recommended, if you recall the episode, ITC as a remedy and that eventually had to be sorted out by a legislative change in 2018 by adding an entry in the Schedule III to the GST Act to keep the transaction out of the scope of Supply of neither a good nor a service, without curtailing the common credits of ITC relatable to such high seas sales, as well.

Whatever be the efficacy of the RCM mechanism and the powers vested in the armor of the Government, to legislate laws to levy a tax on the said services would be way too long a haul of a transaction that both happens outside the territory of India and as well as lacks any territorial nexus as excepted under Article 245((2) of the Constitution.

The Importer, if had not paid the tax on the Ocean freight element on the Goods Imported, then the territorial nexus and the taxation interest of India might be said to be at stake and would be quite justified in being invoked, but not when the tax is duly discharged by a comprehensive valuation mechanism on Imports, already well in place.

Hence, all the attempts made in Pre and Post-GST times vide an RCM Notification issued under Section 5(3) of the IGST Act and amending Section 5(4) of the IGST Act by a Notification issued in February 2019- to ratify the action from 1/7/2017 to 31/1/2019 and before, would most likely to become infructuous.

The fact that Customs Valuation instead of FOB if CIF would also hardly make a difference, by mere reason of the fact that the last mile delivery of goods imported is happening in India, as the Import Valuation had since commenced right at the Load port and had well answered the levy on Ocean freight and Insurance on Imports, as a composite levy.

End Note

So, it is imperative that the Government takes urgent notice of the above double taxation confusions created by its unimaginative bureaucracy over the last decade or more.

It is also high time the Government remedied these grievances of Import trade and mitigate the mounting litigations choking the Tribunals and the Courts of the Country as a fall out of the above indiscretion of the bureaucracy, is the earnest appeal of the Author to the Government on behalf of the import -intensive Industry and trade.

[The views expressed are strictly personal.]